Asia Misses Out on Capital Spending Bump

Capital investment in emerging markets, especially Asia, is lagging the developed world, a trend likely to damp growth prospects in many nations.

Global expenditure on capital goods like equipment and machinery, used in offices, factories and to build infrastructure, began to pick up around a year ago. A survey of output at global machinery and equipment firms by Markit and J.P. Morgan began to recover in the first quarter of 2013 and has gained steadily since then.

Businesses in the U.S., Europe and Japan have led the renaissance, as demand increases and financial conditions improve. In emerging markets, the investment outlook is a lot more clouded.

Asian businesses have been reluctant to expand. Partly this is due to a tepid pickup in demand from industrialized countries for Asia’s exports. Many factories in the region already are running spare capacity, which is due to tepid exports and also a result of over investment in recent years, especially in China.

Rising global interest rates, as the U.S. Federal Reserve pares back its bond-buying program, is adding to the somber outlook for business spending.

China has relied heavily on investment in steel factories, infrastructure and other heavy industry to spur growth. Today, investment accounts for about half of gross domestic product.

Beijing can no longer rely on this formula, however, and the government is moving to pare down debt and promote a more consumption-led growth model.

There are increasing signs that China is moving away from its reliance on investment. Imports of capital goods into China in January and February averaged $43 billion, the lowest level in a year. (The import data combines heavy, electrical and office machinery.)

Slower imports of capital goods “would be consistent with other signals we have received about investment slowing down” in China, Royal Bank of Scotland economist Louis Kuijs said.

After hitting a year high of 21.4% on-year growth in August, fixed-asset investment in China declined steadily to 17.2 % growth in December, and remained low at 17.9% in January and February.

“We did notice at the end of last year that investment growth started to slow down,” Mr. Kuijs said.

Some observers expect China to fall short of its growth target of 7.5% in 2014 if investment expansion continues to moderate. Others expect the government to step in to boost infrastructure spending to prop up growth, and there’s already tentative signs of this happening.

In other parts of Asia, investment spending already is much weaker than in China and capital goods imports have been dropping since the fall.

Morgan Stanley, in a report Tuesday, said it expects capital expenditure in Asia, excluding Japan and China, to grow 2.1% in 2014, a weak rate and almost unchanged from last year. (And much lower than an average annual increase of 9.7% between 2003 and 2007.)

The report pointed out that investment in machinery and equipment in Indonesia, India, South Korea and Singapore declined in 2013 compared to the previous year.

Demand from industrialized countries for Asian exports will pick up, but not enough to cut into poor utilization rates as factories in the region, Morgan Stanley said. The U.S. economic recovery is largely underpinned by investment, not consumption, which doesn’t help Asia’s export-focused economies, the bank added.

Countries like Indonesia and India could boost investment by structural changes to improve the business environment. China is looking to move up the value chain of manufacturing and develop its service industries.

Still, in the meantime, the dour investment environment is likely to cut into growth rates in Asia. The International Monetary Fund estimates growth in Southeast Asia’s major economies, for instance, will slow to 5.1% this year from 6.2% in 2012. In advanced nations, growth will jump to 2.2% in 2014, up from 1.4% in 2012.

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